The dollar hit a 20-year high as markets braced for higher long-term rates after Federal Reserve Chairman Jerome Powell indicated that interest rates would be kept higher for longer to reduce runaway inflation.
The dollar index, which measures the value of the currency against a basket of currencies, hit a new two-decade high of 109.48.
This left its European counterparts in a bit of a slump, although comments from the European Central Bank revived expectations of a massive rate hike in September.
The euro was down a quarter of a percent in early European trade at $0.99415, within sight of a 20-year low, while sterling hit a two-and-a-half-year low.
Jerome Powell said Friday at the Jackson Hole central bank conference that the Fed would raise rates as high as necessary to restrain growth and would keep them there.”for a while“to bring down inflation, which is more than three times the Fed’s 2 percent target.
“Powell’s comments endorsed pricing in a higher federal funds rate for a longer period” said Kenneth Broux, currency strategist at Societe Generale. “Assumption that the Fed would start cutting rates in mid-2023 is premature“.
Money markets responded by increasing bets for a more aggressive Fed rate hike in September, with the odds of a 75 basis point hike now considered to be about 70%.
U.S. Treasury yields soared, with the two-year bond yield hitting a 15-year high of about 3.49%, supporting the greenback.
The dollar rose 0.8 percent to 138.81 yen, after hitting its highest level since July 21, while the yuan fell to a two-year low of 6.9321 per dollar.
“I think this week the U.S. Dollar Index will head towards 110 points as market participants continue to anticipate more aggressive tightening cycles from major central banks” said Carol Kong, senior associate for currency strategy and international economics at Commonwealth Bank of Australia.
At the Jackson Hole symposium, ECB board member Isabel Schnabel, François Villeroy de Galhau, head of the French central bank, and Martins Kazaks, governor of the Latvian central bank, all argued for strong or significant policy action.
Even as the potential for a sharp ECB rate hike in September rises, the euro has struggled with an energy crisis in the bloc that increases the risks of recession. Russian state-owned energy giant Gazprom is expected to halt natural gas deliveries to Europe from Aug. 31 to Sept. 2.
In crypto-currencies, bitcoin regained some ground but remained below the $20,000 level it plunged below over the weekend.